Q1
At the end of the day, the main goal of a company is to keep a customer satisfied, from the store experience to the product itself. The statement that this senior VP made regarding the rejection of a $50,000 investment in an ABC system can be detrimental to the company. An ABC system refines a costing system by identifying individual activities as the fundamental costs of an object (Datar & Rajan, 2014). Things that are considered activities are designing products, setting up machines, operating machines, and distributing products. Although an investment in a layout of a store for a company may be good as well, an ABC system proves beneficial in more ways than just one.
Benefits of an ABC provide a more accurate method of product/service costing, leading to more accurate pricing decisions. It increases understanding of overheads and costs drivers; and makes costly and non-value adding activities more visible, allowing managers to reduce or eliminate them (CGMA.org, 2013). All of these benefits help with improved company strategies which can lead to an improved quality of product and customer experience. These should be stated to the senior VP, although a $50,000 investment may be seen as hefty or risky, it is all about the return, and with better implementation of strategy and decisions, it will surely return more than invested.
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Q2
The $50,000 is a large investment that would indirectly effective the customers experience and directly effect the businesss costs and profits. Activity-based costing systems enable the company to accurately identify the cost of the products in more detail. When there is more transparency in discovering the cost of a product, this will enable a better strategy and decision making from the managers in terms of pricing, sales and overall management of performance and customer experience. The ABC system will help identify the products and customers which lead to higher profitability. With this kind of detailed analysis, the managers can shift their focus from the non-profitable customers to the more profitable ones. This will benefit the profitable customers in the long run which benefits the overall business.
Managers use activity-based costing (ABC) systems to track indirect resources by identifying homogeneous indirect-cost pools for different activities and by using cost drivers as allocation bases. Without ABC systems, managers will be unable to understand the drivers of overhead costs and the demands different products place on overhead resources (Datar, 2014).
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Q3
Activity-based costing (ABC) refines a costing system by identifying individual activities as the fundamental cost objects (Datar and Rajan, 2014, p. 216). An activity is considered a unit or task of work with a purpose such as operating machines in a company. I would respond to the VP to inform him that although allocating an investment towards what customers see or experience, an ABC system would be as beneficial.
The value ABC systems provide to customers is improved product analysis. Freedman (2020) explains that improved product analysis can lead to higher product quality and more accurate pricing for those products. When the design and quality of a product increases, it provides a longer span of use for customers, leading to better reviews, loyalty, and possibility of purchasing again.
A better accounting system than traditional costing systems may not directly impact customers but it can make a significant impact on a business financial status. A few selling points about the benefits of an ABC system include (Activity, 2013):
More accurate method of product/service costing
More accurate pricing decisions
Understanding of overhead costs
Allow for reduction or elimination of overhead costs
Analysis of operating costs helps allocate costs
Improved product and customer profitability analysis
Although an ABC system may not directly impact customers, it is an excellent accounting tool in assisting a business in regulating, allocating, and reducing costs where possible
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